Profit warnings on the rise in construction and outsourcing sector

As Capita issues a profits warning and sees its shares fall by 40%, Infrastructure Intelligence can reveal that more than a dozen construction, engineering and consultancy companies have issued profit warnings since the start of 2016, signalling that Carillion’s collapse could be the tip of the iceberg when it comes to understanding the financial issues facing the construction and outsourcing sector.

Official records show that big industry names including Interserve, Mitie, Balfour Beatty, Laing O’Rourke and Costain have all fallen on troubled times in the last few years due to losses made on major projects. Carillion’s confirmed liquidation on 15 January has cast doubt over the futures of almost 20,000 employees in the UK with many more set to be affected within the construction giant’s supply chain. 

Politicians, trade bodies and those within the industry itself have reacted to Carillion’s demise by calling on the government to address the issue of late payments. Bury North MP James Frith tabled an EDM calling on the government to honour all outstanding payments on public contracts for work completed and to enforce public sector 30-day payment regulations, while Build UK, the Civil Engineering Contractors Association, and the Construction Products Association have all demanded the gradual abolition of retention payments in the construction industry.

One of the companies to issue a profit warning in the last two years is Interserve, a major supplier to the government across a range of areas including health, education and defence. Recently the Cabinet Office responded to fears about the firm by stating that it did not “believe that any of our strategic suppliers are in a comparable position to Carillion”.

Interserve issued profit warnings in September and October last year after it ran into difficulty on various waste-to-energy contracts. However, just earlier this month, the company said in a trading update that it expected operating profit in 2018 to be better than analysts were forecasting.

Another company to suffer financial problems is Laing O’Rourke after the construction of a major Montreal hospital brought significant financial losses. It is thought to have suffered a £245m loss in December 2016. Canadian contractor Pomerleau replaced the Construction Santé Montréal (CSM) consortium after stage one of the project was handed over by CSM in a bid to minimise further risk.

Just this week, it was revealed that Laing O’Rourke has further delayed publication of its full-year results as negotiations continue over wrapping up its involvement in that loss-making Canadian hospital PFI project.

Construction sector firms to issue profit warnings since the start of 2016 include:

  • Mitie: September 2016 profit warning
  • Laing O Rourke:  £245m loss in December 2016 on ill-fated Canadian hospital. PFI loss of £141m posted due to failure in relation to Design for Manufacture and Assembly
  • Severfield: Built London’s Cheese-grater but problems and costs arose when bolts fell out of the building and had to be replaced (2011 profit warning)
  • Galliford Try: Aberdeen and Firth of Forth crossing – shares dropped by 10% in May 2017
  • Mace: July 2017- profits down 70% - problems with Shard construction
  • Bouygues: October 2017- loss of £78m in 2016, together with £19.5m loss in 2015
  • Costain: Manchester waste deal – 46 waste facilities in Greater Manchester. August 2016 Costain reported losses on this contract of £11.4m. Work completed but extra rectification work needed.
  • Interserve: EFW contracts in Glasgow £160m costs in exiting the market and associated contracts increasing net debt from £390m to £450m – total debt facility of £573m. 10 January profits warning circa £513m EFW
  • John Laing: Manchester waste – May 2017 profit warning termination of waste contracts in Manchester
  • Hochtief: Lost £3.2m on problems of Queensferry Crossing over the Forth
  • Balfour Beatty: Total of seven profit warnings dating from November 2012

It comes as the latest data published by the consultancy firm Ernst & Young shows that profit warnings in Q4 of 2017 hit the highest levels for two years. A total of 81 UK companies issued profit warnings in the last three months of the year - the highest quarterly total since Q4 2015. EY say that FTSE support services filed the most warnings in 2017 out of any sector with 42 during the year. 

According to the report, 30% of all profit warnings in 2017 cited cost and competitive pressures, compared to 16% in 2016. Contract uncertainties also continued in 2017, with 25% of companies citing delays or cancellations.

Alan Hudson, EY’s head of restructuring for UK & Ireland, said: “An increase in restructurings and profit warnings reflects the pressure building across a significant portion of the UK economy. Companies that issue profit warnings are now under greater scrutiny and investors are reacting with less patience, especially in sectors where shareholders view warnings as a sign of deeper issues rather than a one-off event.”

Specifically commenting on the support services that underpin infrastructure in the UK, Hudson said that firms in the industry need strong balance sheets and a open attitude to innovation to succeed in 2018. “The sector will remain in the spotlight in 2018, with public sector contracts in particular under scrutiny,” he added. “Slower UK growth may also limit private sector demand, with activity in the construction sector already slowing. But there is still the potential for companies with strong balance sheets and operational infrastructure to make the most of innovation and expand their business in 2018.”

While the news from Capita is certainly concerning, many industry observers and analysts will welcome the move by its new chief executive to refocus the company and refine its business model and take decisive steps to get the company back on track. It’s current plight however does show the fragility of a market sector where small profit margins on massive contracts continue to be the norm.

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